At press time, it’s unclear when or whether the 80 or so subpoenas (or maybe it’s 200) were sent out; or which group of enthusiasts – be it advisers, lawyers, the issuers or investors – received the outreach. Industry experts believe there is probably a theme uniting the subpoenas, but even that is unconfirmed.

And while many, unsurprisingly, believe the SEC is going after fraudulent issuers, recent reporting indicates the SEC may be working on a systematic investigation of projects working under the simple agreements for future tokens (SAFTs) framework.

A more formal SAFT framework was developed in October 2017 by attorney Marco Santori and the team behind a pioneering project called Filecoin. SAFT is a broad concept that explains how token issuers could remain on the right side of securities laws when issuing what basically amounts to coupons for tokens at a future date when the platform they are used on is complete.

And while some remain measured, one knowledgeable source (who wished to remain unnamed) was extremely candid in talking about the subject, telling CoinDesk:

“The SEC is targeting SAFTs. The new approach of the SEC is to consider tokens as both utility and security at the same time, meaning a token can bring utility to a platform but at the same time can be considered as a security if you sold it to parties that mainly looked for profit on its increase in value.”

A number of the biggest name ICOs in the space, from Kik’s Kin to Filecoin, used the SAFT framework to sell crypto tokens. However, those who have haven’t been entirely forthcoming on any regulatory brokering that may (or may not be) happening behind the scenes.

Kik, for one, declined to comment on CoinDesk’s inquiry about whether they received an SEC subpoena and Filecoin didn’t respond to a request for comment. The SEC did not respond to a request for comment from CoinDesk either.

Still, there are even larger more speculative questions that are now being asked, namely, what will happen to those who invested time and money if SAFTs don’t satisfy securities law?

Issuers in trouble

Those consequences appear to start with issuers. As such, understanding what the SEC is asking for in their requests for information and subpoenas is key.

According to one industry lawyer that wanted to remain anonymous, the 25-page subpoena received by his client was “hyper-detailed,” asking about so many things he described it as “hellish.”

It’s unknown if the SEC is simply trying to get a handle on the industry, or if it’s interested in something more specific, like what kinds of token sales have launched since the agency halted the multi-million dollar Munchee ICO in December.

In fact, many see the Munchee administrative order, which determined the issuer had sold unregistered securities (even though the token was to be used for utility on a platform in the future), as an example of how the SEC would view token issuers.

“If I were consulting for token companies, I would be terrified, and that’s not the reaction [the SEC is] seeing,” an attorney told CoinDesk.

Indeed, it may be that the SEC has become more aggressive because it doesn’t believe the message it sent through that enforcement action was received.

Should this be the case, and the SEC decides to pursue an enforcement action based on a subpoena, a number of options are on the table for issuers themselves.

First, a negotiation would begin between the agency and the company in question. The company could then either agree to settle or go to court.

If the company settles, the information regarding that settlement would be released to the public, and the company would agree to certain steps to come into compliance with securities law. At that point, other issuers would be able to analyze the settlement and assess how their own token launches differ.

If the company decides to go to court, they’ll be up against the SEC, a powerful financial regulator, yet the SEC is in new territory and has no guarantee the courts will side with their arguments.

Yet, none of this will happen fast, according to Timothy Peterson a former SEC enforcement attorney now with Murphy & McGonigle.

He said:

“For ICO issuers, the main thing to understand is that this is a marathon, not a sprint. The SEC will not go away with a simple response. The process is iterative.”

Investors’ fates

As such, investors shouldn’t feel the effects of the probe for some time.

Several securities attorneys who spoke to CoinDesk noted that it’s worth keeping in mind that the SEC’s mission is to protect investors, so any remedy is likely to ensure investors see returns. This is important for investors to understand, because it gives them a sense of how their investment’s fate might be decided and the amount of time it will take.

Let’s imagine that there is a focused sweep targeting SAFTs (though no one has verified that there is). Investors might be asking: what happens if the SEC comes out and says “SAFTs are illegal”?

The truth is, it just won’t be that simple. As we’ve previously reported, every offering in this space comes down to facts and circumstances.

As Coin Center’s Jerry Brito put it in a phone call with CoinDesk. “A SAFT isn’t a thing. They’re all going to be different,” because each one is going to be written a little differently by different attorneys. Though there is a model most probably start with.

The SEC would look at them one by one. The best an existing project could do is look at the outcome of one case and ask themselves how much their own offering resembles it. Investors, of course, can do the same.

If the SEC comes down hard on a particular version of the SAFT, it might order a project to return remaining funds to SAFT holders, such an order could be complicated if the funds have been transferred to a foreign entity (as has often been the case), such as a Swiss foundation.

Whatever remedy regulators pursued in a given case, there’s no reason to believe another would resolve the same way. We won’t see a blanket statement from the state about SAFTs in general.

“A court looking at a particular offering would never say that the SAFT is broken,” Brito explained. It would only ever make a judgement about that particular instrument. How was it constructed? How was it marketed? What were investors led to believe? And so on.

There is one way that the SEC could take a broader approach to the sector. It could offer a regulatory guidance, one that provided generalized views on how token sales can and can be conducted within securities law, including its take on SAFTs.

“I don’t think that’s very likely,” Brito said.

But even then, the SEC is unlikely to punish investors for buying an instrument they believed created in a responsible fashion. As Peterson wrote:

“One would hope the SEC would see SAFTs as agreements put together in good faith.”